World REPUTATION: "You Are Your Credit Score"

REPUTATION: YOU ARE YOR CREDIT SCORE

Whether you’re applying for your first credit card or seeking a loan, the bank will value one number above all else: your credit score. This number is meant to reflect your creditworthiness and therefore your risk of default. It is the amalgamation of a number of inputs, from how long you’ve borrowed to your payment track record. Most retail credit depends on it. But the calculation is deeply flawed.

First, it is incredibly narrow. A young person with no credit history might have a sterling reputation, a track record of fulfilling commitments, or a rich aunt. None factors into a credit score.

Second, the score creates perverse incentives for individuals. Increasingly, people use debit cards, that is, the cash in their account. Because they have no credit score, they get penalized. Yet credit card firms encourage individuals without resources to apply for credit cards anyway.

Third, scores are very laggy: data inputs can be outdated and have little relevance. A late payment at the age of twenty has little bearing on one’s credit risk at fifty.

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